ComfortDelGro - DBS Research 2020-02-05: Riding Against The Bug; Contrarian Or Foolhardy?

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COMFORTDELGRO CORPORATION LTD (SGX:C52)

ComfortDelGro - Riding Against The Bug; Contrarian Or Foolhardy?

• Accumulation opportunity with ComfortDelGro's share price down by 10% YTD; upgrade to BUY.
• China accounts for 4%/9% of ComfortDelGro (SGX:C52)'s revenue and operating profits.
• Experience from 2003 SARS indicate impact is only temporary.
• Valuation at -1SD historical average, based on our below-consensus earnings forecasts.

An opportunity to accumulate; upgrade to BUY.

• We believe the recent weakness in ComfortDelGro's share price (-10% YTD vs STI’s -1%) could present an opportunity for accumulation. Notwithstanding the impact on its China operation arising from the outbreak of novel coronavirus in Wuhan and across the Hubei province, we believe the implications for ComfortDelGro should be temporary.
• Share price is trading at 16x FY20F which is -1SD below its 5-year historical average, coupled with a c.5.0% dividend yield. Granted that it will be tough to indicate if share price has reached a near-term bottom, particularly given the fluid situation, we believe we could be around it.
• ComfortDelGro (SGX:C52);

China ops affected by Wuhan virus…

• ComfortDelGro announced last week via a media release that its China operations are feeling the impact of the outbreak of the novel coronavirus (2019- nCoV). As of the release, it was shared that its Nanjing driving centre has been instructed to suspend operations, and its bus station in Guangzhou saw a 15% decline in traffic during the Chinese New Year period, compared to a year ago. See ComfortDelGro's announcements.

But China operations account for only 4%/9% of Group Revenue and Operating Profit

• ComfortDelGro’s operations in China spans nine cities – Beijing, Jilin, Shengyang, Chengdu, Shanghai, Suzhou, Nanjing, Guangzhou, Nanning. It does not have operations in Wuhan or the Hubei province. As of 9M19, China accounted for 4% of Group’s revenue and c.9% operating profits.
• ComfortDelGro's business in China includes operation of taxi fleet, car rental, bus station and driving centres. We estimate that taxi (c.11,000 fleet size) is the largest contributor to its China operations, accounting for c.50% of China profits or 4% of the Group’s operating profits.
• We estimate that the driving centres and bus station account for less than 3% of the Group’s operating profits, based on 9M19 figures. While we acknowledge that there would be impact on its other operations, we do believe (and hope) that this is only temporary.

Looking back at history: SARS – drawing lessons, and price action.

• Drawing reference from SARS in 2003, ComfortDelGro’s taxi operations in Singapore were impacted. During that period, the company extended S$10/day rental rebates to taxi hirers for two months from April to June, and this was stepped down to S$7/day in July for a month and thereafter to S$3.50/day in August for another month. In addition, diesel rebates were also extended to taxi hirers. During that period, ComfortDelGro had a total operating fleet of about 16,000 taxis.

Share price reaction on news of taxi driver contracting SARS.

• We looked at the price action of its shares during that period. Over that period from April* to July 2003, save for a brief bout of panic selling when a Comfort taxi driver was diagnosed with SARS, share price remained relatively resilient. (*note: ComfortDelGro share price was listed only on 1 April 2003, with the merger between Comfort and DelGro.)

Singapore Budget 2020 could see relief packages for transport operators.

• We believe some silver lining could arise from the upcoming Singapore Budget 2020 to be revealed on 18 February 2020. Back in 2003, the Singapore Government unveiled a S$230m SARS relief package for the service, tourism and transport sectors.
• For the transportation industry, the measures in 2003 pertained to the diesel tax rebate for taxis and deferment of the taxi operator licence fees that was meant to be introduced on 1 June 2003.

Diesel tax currently at S$850/year, and taxi operator licence at 0.3% of revenue.

• The Special diesel tax for taxis was most recently reduced to S$850/ year, down by S$100, from 18 February 2019. This was on the back of higher diesel tax. For taxi operator licence fee, it currently stood at 0.3% of gross revenue.
• Based on our estimates, both these cost items amount to c.S$11m for ComfortDelGro; and we expect relief, if any, to be passed on to taxi drivers for their benefit.

Worst-case scenario should taxi rental rebates come into play; ~0.9%-3.9% on profits.

• We undertook some scenarios assuming rental rebates come into play in Singapore. Assuming similar situation and response by ComfortDelGro undertaken during SARS in 2003, we worked out scenarios of extending taxi rental rebates.
• Assuming a rental rebate of S$10-15/day extended to its fleet of 11,200 taxis, we estimate this could shave off about 0.9-3.9% (or c.S$2.8-11.5m) from our FY20F net profit forecasts depending on the amount and period offered (and should this be implemented). While this may seem significant, we believe this is unlikely to be extended for a prolonged period, and once removed would revert to normalcy relatively quickly (assuming fleet size do not contract further).
• See ComfortDelGro's share price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.

Andy SIM CFA DBS Group Research | https://www.dbsvickers.com/ 2020-02-05

SGX Stock Analyst Report BUY UPGRADE HOLD 2.45 DOWN 2.480